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Environmental surcharges will be permanently tacked onto Canadian pipeline tolls if the National Energy Board (NEB) grants requests by natural gas and oil transporters to make shippers cover cleanup liabilities.

Total extra delivery bills add up to about C$268 million/year in applications for surcharges to bring federally regulated pipelines into compliance with a February directive by the NEB. The board directed owners of 61,189 kilometers (36,713 miles) of pipelines to raise C$6.4 billion as retirement savings to pay for eventually turning off, abandoning and reclaiming the networks at the end of their useful lives (see NGI, March 11).

The surcharge requests are the second step taken toward compliance. The applications follow through on a joint proposal, filed with the NEB in March, by 13 pipelines to create an "abandonment trust" modeled on personal pension plans, with the fundraising spread over projected remaining lifespans of the energy conduits.

Gas lines comprise 48,650 kilometers (29,190 miles) or 80% of the Canadian fossil fuel delivery network. Liquids, ranging from tarry bitumen to refined products and lighter fluid-like gas byproducts such as propane and ethane, fill the other 12,538 kilometers (7,523 miles) or 20% of the grid. Proposed environmental toll surcharges vary depending on forecast lifespans of the pipelines, volumes of traffic, and amounts of farm and residential land that each one traverses.

Over corporate protests, the NEB ordered the cleanup liability funds to cover a rule-of-thumb standard of digging up and removing 20% of the lines that pass through agricultural and populated areas.

The companies sought permission to leave all their metal in the ground to rust away naturally and only take precautions against cave-ins by filling potentially hazardous stretches of abandoned pipe with concrete. But the environmental liability case, known as the "land matters initiative," has at times been hotly contested since it began more than five years ago. Owners of farm and household property on or near pipelines formed a national organization and sought eventual removal of up to 100% of the buried steel conduits.

As the biggest gas transporter, responsible for a 55-year-old Mainline from Alberta to Ontario, Quebec and multiple export border crossings into the United States, TransCanada Corp. leads the environmental surcharge pack (see NGI, May 6). TransCanada seeks to collect an extra C$117 million a year from gas shippers to raise about C$2.2 billion in eventual Mainline retirement costs. The aging, half-empty route has the industry's shortest forecast remaining lifespan until the entire system has to be shut down: 25 years. The proposed Mainline retirement savings surcharge works out to C4.2-6.7 cents/gigajoule (US4.4-7 cents/MMBtu).

At the opposite end of the liability spectrum, rival Alliance Pipeline -- built in 1999 as a more remote express, or bullet, route to Chicago from northern British Columbia and Alberta -- runs full, gives itself 40 more years to live and concedes only C$254.5 million in eventual abandonment costs. The proposed Alliance cleanup surcharge works out to C$8.8 million per year or C1.8 cents/Mcf per (US1.8 cents/MMBtu).

All the pipeline companies are seeking NEB approval to raise 100% of their forecast cleanup and reclamation costs from shippers. The industry's starting point is an NEB statement in its first ruling on the marathon environmental liability case, which in 2008 stated that no cleanup costs would ever be loaded onto property owners along the pipeline. The board said, "Abandonment costs are a legitimate cost of providing service and are recoverable upon board approval from users of the system."

But the ruling did not explicitly promise that pipelines would be allowed to recover 100% of their environmental liability from their transportation service customers. The extent, if any, of contributions that might be required from the corporations that own the pipelines remains an open question after TransCanada failed, in a parallel toll case, to obtain an NEB guarantee that shippers will pay 100% of the abandonment trust fund (see NGI, June 17).

On the liquids pipelines, an additional surcharge is developing for a separate environmental liability. The Conservative government in Ottawa has declared intentions to enact rules requiring creation of a C$1 billion fund to cover costs of any future oil spills.

The plan surfaced in a report of the Canadian senate on readiness for accidents, following an inquiry triggered by the 2010 BP plc Macondo well blowout in the Gulf of Mexico (see related story). The review recommended increases in damage control deposits created for 1970s and 1980s arctic and offshore drilling (see NGI, Jan. 31, 2011).

A similar proposal is included in a list of potential approval conditions for Enbridge Inc.'s hotly contested Northern Gateway plan for a new oil pipeline from Alberta to the Pacific coast of BC, released by a joint review panel of the NEB and the Canadian Environmental Assessment Agency. Enbridge has replied that since the emergency fund would be available for any spill, all oil lines -- and in turn, their shippers -- should contribute.

While every penny counts for producers and merchants on the depressed natural gas side of the Canadian energy industry, high prices in the range of US$90-100/bbl dwarf the proposed environmental surcharges in the expanding oil sector. In the abandonment and cleanup case, Enbridge needs to raise C$1.1 billion in pipeline retirement funds but requests a surcharge of only C$39 million a year or C44.8 cents/bbl by spreading costs over a projected 40-year lifespan and traffic that exceeds two million b/d and continues to grow on its Canadian oil system.

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About NGI

Natural Gas Intelligence (NGI), is a leading provider of natural gas, shale news and market information for the deregulated North American natural gas industry. Since the first issue of Natural Gas Intelligence was published in 1981, NGI has provided key pricing and data relied upon daily by thousands of industry participants in the U.S, Canada and Mexico as well as Central and South America, Europe and Asia.